Position Sizing: The 1% Rule and How to Calculate Risk Per Trade

Most traders obsess over entries and exits. The ones who survive obsess over how much they risk per trade. Position sizing is the single most important skill in risk management, and the 1% rule is where it starts. Get it wrong and even a great strategy will blow your account. Get it right and you can weather losing streaks that would wipe out most traders.

This post breaks down the math behind the 1% rule, shows you exactly how to calculate position size across forex, stocks, and CFDs, and demonstrates why risking too much per trade is a mathematical death sentence.

What Is the 1% Rule

The 1% rule is simple: never risk more than 1% of your total trading account on a single trade. If you have a $10,000 account, the maximum you should be willing to lose on any one trade is $100.

This is not the same as investing 1% of your account. You can open a position worth many times your account balance (depending on leverage). The 1% refers to the dollar amount you would lose if your stop-loss gets hit. The formula is straightforward:

Risk per trade = Account Balance x Risk Percentage

Some experienced traders push this to 2%. Some ultra-conservative systems use 0.5%. But 1% is the benchmark for a reason: it keeps you in the game long enough to let your edge play out.

Why It Matters: The Math of Ruin

The reason the 1% rule exists is not about any single trade. It is about what happens over a sequence of losses. Every strategy, no matter how good, will produce losing streaks. The question is whether your account can survive them.

Here is what happens to a $10,000 account after 10 consecutive losing trades at different risk levels:

At 1% risk, ten straight losses cost you less than 10% of your account. Uncomfortable, but completely recoverable. At 5%, you have lost 40% and now need a 67% gain just to get back to breakeven. At 10%, you are down 65% and the account is effectively crippled. That is why position sizing is not optional. It is survival.

How to Calculate Position Size: The Universal Formula

The core calculation works the same way regardless of the asset. You need three numbers:

1. Account balance — your total trading capital
2. Risk percentage — typically 1% (or 0.01)
3. Stop-loss distance — the gap between your entry price and stop-loss, measured in the asset's price unit

Position Size = (Account Balance x Risk Percentage) / Stop-Loss Distance

The output of this formula gives you the number of units (shares, lots, contracts) to trade. Let us walk through each asset class.

Stocks: Calculating Share Count

Suppose you have a $25,000 account and want to buy a stock at $150 with a stop-loss at $145. Your stop-loss distance is $5 per share.

Risk amount: $25,000 x 0.01 = $250

Position size: $250 / $5 = 50 shares

Total position value: 50 x $150 = $7,500 (30% of account)

Notice the position is 30% of your account, but your actual risk is still just 1%. This is the distinction many beginners miss. Position size and risk are not the same thing.

Forex: Calculating Lot Size

Forex uses lots. A standard lot is 100,000 units of the base currency, where 1 pip equals roughly $10. A mini lot (10,000 units) is $1 per pip, and a micro lot (1,000 units) is $0.10 per pip.

Suppose you have a $5,000 account and want to short EUR/USD with a 30-pip stop-loss.

Risk amount: $5,000 x 0.01 = $50

Dollar value per pip needed: $50 / 30 pips = $1.67 per pip

Lot size: $1.67 / $10 per pip = 0.167 standard lots, or roughly 1.67 mini lots

Most brokers let you trade in increments of 0.01 lots (micro lots), so you would round down to 0.16 standard lots. Always round down, never up. Rounding up means you are risking more than your plan allows.

CFDs: Calculating Contract Size

CFDs work similarly to stocks, but you are trading contracts rather than owning the underlying asset. The calculation is the same, but pay attention to the contract specification your broker uses.

Suppose you have a $10,000 account and want to go long on a stock CFD priced at $200 with a stop-loss $8 below your entry.

Risk amount: $10,000 x 0.01 = $100

Position size: $100 / $8 = 12.5 contracts (round down to 12)

With CFDs, leverage means your margin requirement will be a fraction of the position value. But your risk calculation should always be based on the full stop-loss distance, not the margin.

Position Sizes at Different Account Levels

To make this concrete, here is what 1% risk looks like across different account sizes, using a stock at $100 with a $4 stop-loss as a standardized example:

With a $1,000 account, you can only buy 2 shares. That is fine. Small accounts require patience and realistic expectations. Forcing larger positions to "make it worthwhile" is exactly how small accounts become zero-balance accounts.

Adjusting for Volatility

A fixed 1% risk is a good baseline, but not all trades carry the same uncertainty. A blue-chip stock does not move like a biotech penny stock. Here is how to adapt.

Use ATR (Average True Range). ATR measures how much an asset typically moves in a given period. Setting your stop-loss at 1.5x to 2x the daily ATR gives your trade room to breathe without getting stopped out by normal noise. Then calculate your position size from that stop-loss distance.

For example, if a stock has a 14-day ATR of $3 and you set your stop at 2x ATR ($6), your position size on a $25,000 account would be:

$250 risk / $6 stop = 41 shares

Compare that to a tighter $2 stop, which would give you 125 shares. The wider stop means fewer shares but a higher probability of the trade working as intended. This is the fundamental tradeoff in position sizing: tighter stops allow bigger positions but get triggered more often.

Reduce risk percentage for high-volatility assets. If you are trading a small-cap stock that routinely moves 5-10% in a day, consider dropping to 0.5% risk. The wider stop-losses required by volatile assets already increase your position's notional exposure to price swings.

Practical Tips for Implementation

• Calculate before you enter. Determine your stop-loss and position size before placing the trade, not after. If the math says you can only afford 3 shares, then you trade 3 shares or you skip the trade entirely.
• Use a position sizing calculator. Most brokers offer these built in. There is no reason to do mental math when real money is on the line.
• Account for commissions and spreads. On small accounts, a $5 commission on a $10 risk trade is eating 50% of your risk budget. Factor costs into your calculation.
• Never move your stop-loss further away after entry. If you widen your stop, you are increasing your risk beyond what you planned. The only acceptable stop-loss adjustment is tightening it.
• Reduce size during drawdowns. Because the 1% rule is percentage-based, your position size automatically shrinks as your account shrinks. This is a feature, not a bug. It slows down losses when you are trading poorly.

Key Takeaways

Position sizing determines how long you stay in the game. Your strategy determines whether you win. You need both, but sizing comes first.

• The 1% rule means risking no more than 1% of your account balance on any single trade.
• Position size = (Account Balance x Risk %) / Stop-Loss Distance. This works for stocks, forex, and CFDs.
• Ten consecutive losses at 1% risk costs you less than 10%. The same streak at 10% risk destroys 65% of your account.
• Always round position sizes down, never up.
• Use ATR to set volatility-adjusted stop-losses, then calculate your position from there.
• Small accounts mean small positions. Accept this or do not trade.

Disclaimer: This content is for educational purposes only and does not constitute financial advice. Trading involves substantial risk of loss. Past performance does not guarantee future results.